Impact of Changes to Stamp Duty Land Tax on PCL Investments

When acquiring residential property, investors need to take consideration of the various different taxes, one of which being Stamp Duty Land Tax – a tax payable on the acquisition of property and based on the acquisition value.

Purchasers of properties in the UK have been paying Stamp Duty on transactions for more than 300 years, with the current system of Stamp Duty Land Tax introduced in December 2003.

In the last three years however there have been two significant changes to the thresholds and levels of Stamp Duty Land Tax (SDLT) payable in the upper price thresholds of the market.

In April 2011, a new rate of 5% was introduced for property purchases over £1 million. A year later, a further band was added for property purchases over £2 million.

From March 2012, buyers of properties over £2 million have incurred a 7% tax on the purchase price. Furthermore, those buying through a corporate body could be subjected to a higher rate of 15%.

As property purchasers look to save on tax, these new threshold inevitably create distortions in the market, however SDLT is only one of the many considerations that investors need to make when acquiring property.

As part of our most recent research we analysed the impact of these SDLT changes on the Prime Central London market, and how investors should incorporate the findings into their buying considerations. This research found:

The introduction of a £1 million Stamp Duty Land Tax threshold in April 2011 has had little lasting impact on the market at this level. While a record number of deals were completed in the month leading up to the change, and 59% of these sales were for more than £1 million, the market soon stabilised as buyers absorbed the additional costs.

The 7% tax for buyers over £2 million (15% for company purchasers) introduced in March 2012 impacted the market more. Immediately average prices paid per square foot for properties just over £2 million fell by 14.6%. Sales between £2 million and £2.5 million fell by 32% over the following year.

The £2 million Stamp Duty Land Tax threshold remains a drag on the market today and is suppressing values up to £400,000 over the threshold. Prices paid per square foot in 2013 for properties between £2 million and £2.1 million were 6% lower than properties sold between £1.9 million and £2 million. Meanwhile, the average price per square foot achieved on properties sold between £2.1 million and £2.2 million was 16.5% lower. The market does not start to stabilise until prices reach £2.4 million.

Property investors, mindful of anticipated market appreciation in coming years in Prime Central London should be aware of the buffer around and just over the £2 million mark.

Investors considering a short term hold may be unwise to purchase properties between £1.6 million and £2 million as future price growth could be restricted once property values go above £2 million and the value per sq ft falls. However, longer-term investors may well find better gains on properties above the £2 million mark if they are prepared to wait for, and make the assumption that, capital appreciation will push their properties far enough above the threshold for the impact to be mitigated.

In the market above £2m we are also seeing more interesting investment opportunities for clients where additional value, above future market growth, can be gained through refurbishment or planning. It is for this reason, and coupled with the effect of the new £2m SDLT threshold, that we believe this could be the most rewarding segment of the market for long-term investors.

The full research can be found at http://www.huntlyhooper.com/downloads/research-reports/Huntly_Hooper_Research_Report_April_2014.pdf

Article written by:
Ollie Hooper MRICS, Director
Huntly Hooper Ltd
Ollie@huntlyhooper.com
+44 203 178 7071

Huntly Hooper is a residential buying service specializing in acquiring prime property for private clients, family offices, trust and funds, for investment and personal purposes. The company is regulated by the Royal Institution of Chartered Surveyors (RICS). http://www.huntlyhooper.com

IMAGE: Ollie Hooper, Director, Huntley Hooper Ltd